California is bad for business? Don’t tell Californians.

California lost a major multinational business this month when Chevron announced plans to move its headquarters to Houston. This comes on the heels of another high-profile defection from the Golden State – Elon Musk saying in July that he’ll move both SpaceX and the social media platform X, also to Texas.

With the 2024 presidential race now headlined by a California Democrat, Kamala Harris, the political question surrounding such moves is in the spotlight. Put simply, are people and jobs being driven out of California by a hostile business climate?

How hostile the state is depends on whom you ask. Critics and defectors decry the Golden State’s aggressive environmental regulations, high taxes, and socially liberal policies. California’s cheerleaders note its top rank in a host of economic metrics and quality of life, symbolized by year-round sunshine, sandy beaches, redwood groves, and jagged Sierra peaks. 

Its dazzling Hollywood history and tech titans attest to the promise that maybe you, too, can strike it rich here with the right idea, the right connections, and perfect timing. The state motto is still “Eureka!” 

While the Ancient Greek word means “I’ve found it,” the million-dollar question for many today is more “Can I keep it?” High costs have become a key factor behind increasing outward migration by people and businesses. Critics say the Golden State economy is no longer golden. 

“It’s an economy that simply exists by sheer strength of being the most wonderful place on the planet,” says Lance Christensen, head of policy and government affairs for the conservative California Policy Center.

But the picture here is a nuanced one, and California’s advocates say the state should hold its head high.

Ashley Landis/AP/File

California lost a major multinational business this month when Chevron announced plans to move its headquarters to Houston. Gas prices are displayed at a Chevron gas station in Long Beach, California, March 9, 2022.

“When you’re backward-looking, you have one point of view,” says Lenny Mendonca, former chief economic and business adviser to California’s Democratic governor, Gavin Newsom. “When you’re forward-looking, I don’t think there’s a state in the country that would not trade their economy for California’s.”

CEOs see California as worst state for business 

California is the most populous state in the United States, with 1 in 8 of the nation’s residents. But after tripling in the last half of the 20th century, the state’s population growth has slowed steadily over the last few decades, falling behind the national growth rate from 2010 to 2020. For three of the most recent years, residential numbers were in the red until returning to a slight increase in 2023. 

Those shifts are consequential: California lost a congressional seat after the 2020 census. And the outward migration from 2020 to 2022 cost the state over $100 billion in lost revenue from personal income tax. 

A recent survey of chief executives ranked California the worst state in which to do business, citing burdensome regulations, labor costs, and high taxes. More than 350 businesses moved their headquarters out of state from 2018 to 2021. Eleven of those were Fortune 1000 companies. And they’re moving mostly to Texas, Tennessee, and Nevada, where corporate taxes are lower and labor is cheaper. 

Lower costs are the simple draw. Companies aren’t leaving because of the climate or other amenities, says Kenneth Miller, director of the Rose Institute of State and Local Government at Claremont McKenna College. “They’re leaving because they think it’s more affordable and they can make more profit in Texas than in California.”

This may help explain why Texas’ growth has outpaced California’s so far this century. In 2000, the Lone Star State’s economy was a little over half of California’s; by 2023, it was closing in on two-thirds. In the last year alone, Texas’ growth rate was more than twice that of California – the biggest one-year gap in almost 20 years.

High tech, high costs, and tree nuts

But the number of California tech startups – more than 7,600 in the past five years – far outweighs the number leaving. And for the first time in a decade, California is the state with the most Fortune 500 companies, with 57. 

“California spends no time trying to get other companies from other states to move here,” says Mr. Mendonca. “We grow our own.”

Innovation is at the heart of California’s business culture, whether it’s world-changing technology or fantasy-inspiring entertainment. 

“That’s part of the California myth, or belief system, that we can be creating things that can be world changers, right?” says Professor Miller. “We’re right at the top.”

The global tech center accounts for 30% of the state’s economy, when factoring in financial ripple effects, according to the California Foundation for Commerce and Education.

Manuel Orbegozo/Reuters

The logo of Google, one of California's corporate crown jewels, is seen outside Google Bay View facilities during the Made by Google event in Mountain View, California, Aug. 13, 2024.

But in recent years, especially since the pandemic, the luster of an idea-based economy, which designs things but doesn’t always make them, has dulled. Americans have learned that global supply chains can break down and that it’s risky to rely on a geopolitical rival like China to make America’s goods. 

Still, global trade remains a big part of the California economy, from inbound containers of Asian-made goods to outbound exports like tree nuts and fruits from the state’s nation-leading farm sector.

“As long as we can continue to hold a place in the global knowledge economy, we will continue to be a very high value added and therefore rich state, with a lot of poor people ... driving around because we have extreme income inequality,” says Martin Kenney, a community development professor at the University of California, Davis and co-director of the UC Berkeley Roundtable on the International Economy.

Terry Chea/AP/File

Employees inspect almonds in the processing facility at Stewart & Jasper Orchards in Newman, California, July 20, 2021. California is the world's largest producer of almonds.

For richer, for poorer

That inequality is inescapable. Nearly a third of Californians are poor – living in or near poverty. That’s a 2.4% uptick from two years earlier. And California has more homeless residents than any other state, up about 20% in five years.

The meaning of “well paid” is different here, as the cost of housing outpaces wages. California homes hit a median sales price of $900,000 this summer – a first – and more than twice the national median. Other things such as groceries and utilities cost more here, too.

Still, the California dream persists, bringing dynamism to the state’s economy.

Small businesses – those with fewer than 500 employees – employ nearly half the state’s workers. Between 2021 and 2022, some 130,000 new small businesses formed in California, but more than two-thirds as many closed in that same year.

Every small business is an opportunity, says Loren Kaye, president of the California Foundation for Commerce and Education. 

“Every one of those that close or move could wind up being the next Tesla, or name your success story, not happening in California. That’s a big risk,” he says. “You just don’t want to have systemic disincentives to form small businesses that do provide those employment opportunities.” 

Among those disincentives are aggressive environmental regulations. California’s landmark environmental law is a 44-year-old novel-length list of codes and procedures aimed at minimizing the environmental impact of any development. The state has lofty environmental mandates: an 85% cut in 1990-level emissions by the year 2045, and all electricity from carbon-free sources by then, for example.  

Chevron’s exit “didn’t happen in a vacuum” says Mr. Christensen. “It happened because Gavin Newsom’s Legislature made it inhospitable to do business in California, and even the biggest, oldest, and most wealthy business in California decided that they wanted nothing to do with this.” 

Chevron has long been vocal about the difficulty of doing business in California, where thousands of employees will remain even when the corporate leaders move. But some of the decline in its own business prospects here reflects the transition toward a cleaner economy where other employers can prosper in the future. 

“California isn’t for everybody, but it’s certainly for a lot of different businesses and industries,” says Mr. Kaye. “You pay a price for being here, but you also get something for it.”

Staff writer Laurent Belsie contributed to this report.

Editor's note: Martin Kenney's title has been updated to give his correct area of specialty as a community development professor.